JPMorgan gets nod to resume stock buys after Whale loss

By David Henry

Published November 08, 2012

Reuters

N – JPMorgan Chase & Co said it plans to buy back as much as $3 billion of stock early next year after U.S. regulators authorized it to buy shares again, the latest sign the largest U.S. bank is healing after big trading losses.

The bank halted its share repurchases in May when it said it was going to suffer at least $2 billion of trading losses from bad bets on credit. Those losses ballooned to more than $6 billion. The bank now believes that most of the pain is in the past.

The company disclosed the buyback approval on Thursday in a quarterly filing in which it also revealed that it has reached "an agreement in principle" with the Securities and Exchange Commission (SEC) to resolve two previously-disclosed investigations related to mortgage-backed securities.

The Federal Reserve told the bank on Nov. 5 that it had approved the plan, JPMorgan said in the SEC filing.

The company is moving past the losses from what became known as the "London Whale" trades, for the trader who entered at least some of the positions. The regulatory consequences are still lingering.

JPMorgan disclosed that it is still responding to investigations into the debacle by government authorities in the United States and the United Kingdom.

The losing derivatives positions were disclosed by JPMorgan on May 10, more than a month after reports surfaced in the credit markets that Bruno Iksil, a London-based trader for JPMorgan known as the London Whale, had made massive bets in credit markets.

The approved plan provides for JPMorgan to continue paying its current quarterly dividend on common stock, the filing said.

JPMorgan spent $9 billion in 2011 to buy back its shares. It was on track to spend as much as $12 billion this year until the derivatives losses surfaced.

CEO Jamie Dimon told investors on May 21 the bank had suspended repurchases of its stock to rebuild its capital and meet higher requirements for financial safety.

Under restrictions imposed after the financial crisis, JPMorgan and other big banks cannot buy back stock or increase their dividends without approval from the Federal Reserve. Those restrictions came about because many banks paid out too much capital in 2007 and 2008 as the mortgage crisis widened, leaving them weaker when they were hit by big losses.

JPMorgan must submit another plan to the Federal Reserve, and get approval, to be able to continue using capital to buy back stock after next March. The newest approval suggests that JPMorgan will be allowed to spend at least $12 billion next year, analyst David George of Robert W. Baird & Co noted in a research report.

The current dividend, which is 30 cents a share, costs the company about $4.5 billion a year. If the company were to pay out that much in dividends and spend $12 billion buying its stock, the total return of capital to shareholders of $16.5 billion would amount to about 80 percent of net income that analysts expect the company to earn in 2013.

In mid-day trading on the New York Stock Exchange, JPMorgan stock rose 0.9 percent to $40.86 after being up as much as 2.5 percent.

AGREEMENT WITH SEC

The company did not provide an estimate of how much the settlements with the SEC over mortgage securities could cost.

One of the cases stems from disclosures by JPMorgan of delinquencies involving one mortgage-backed securitization. The other case is over multiple securitizations by Bear Stearns, the failed investment bank that JPMorgan took over in March 2008 in the financial crisis.

The company had disclosed in February that the SEC had said in January that it was considering whether to recommend taking action against the company for the two matters.

The company faces numerous other investigations and private lawsuits stemming from the financial crisis and from the Whale debacle.

In the filing Thursday, JPMorgan raised its estimate of how much litigation could cost the firm above its legal reserves to $6 billion from $5.3 billion disclosed three months ago.

The company also said it is "in the early stages" of counting the potential impact of Hurricane Sandy hitting the East Coast on October 29. The bank has waived some checking account and loan fees for late payments.

The total financial cost of Sandy to the bank will depend in part on the losses its borrowers suffer after collecting insurance proceeds and government assistance, the filing said.